Spanish yields dip after court suspends Catalonia referendum

LONDON: Spanish government bond yields edged lower on Tuesday after the country's constitutional court suspended an independence referendum called by one of its richest regions.

Catalonia President Artur Mas on Saturday signed a degree to hold a referendum on Nov. 9, a move that spooked investors who feared Spain may lose a region that accounts for around a fifth of Spain's economic output.

Fitch ratings agency put the region's BBB- rating on negative watch as a result. The agency said that rating might be downgraded by at least two notches if Catalonia found itself without access to central government financing.

"Spain is driving Italy and other peripheral markets in this current environment due to the political risk that is sitting with the separatist movement in Catalonia," said Alessandro Giansanti, senior rates strategist at ING.

Spain's 10-year yields edged 3 basis points lower to 2.21 percent, while Italian bonds fell by a similar amount to 2.39 percent.

Traders said investors were also taking hesart from the news that Italian Prime Minister Matteo Renzi overcame fierce opposition to win backing in his party for labour reforms.

Portuguese equivalents were flat at 3.16 percent, while Monday's sharp sell-off in Greek bonds appeared to have died off with yields 1 bps lower on Tuesday at 6.51 percent.

Strategists warned, however, that Greece's plan to escape the strict conditions of its bailout programme could still rattle investors going forward.

"Greece's aim to wean itself off from the final IMF tranches not only implies increasing supply pressure in GGBs which still have a limited investor base, but also a weakening lever on Greece's fiscal prudence and reform efforts," Commerzbank strategists said on Tuesday.

Already on track for their first monthly rise since February, German Bund yields inched up ahead of September's euro area inflation reading due at 0900GMT.

Ten-year yields rose 1 bps to 0.97 percent.

Economists polled by Reuters had predicted a reading of 0.3 percent, but German reported on Monday its inflation rate was higher than expected. Some analysts see a possibility the euro zone rate will be higher as well.

Yields would probably rise across the region if inflation does come in higher than expected. That would take some pressure off the European Central Bank to introduce new policy measures to stimulate the euro zone economy. The ECB meets on Thursday in Naples, Italy.